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Mindtree: Forex gains kick up profits

Jan 20, 2010

Performance summary

Operating margins contract by nearly 1% QoQ during the quarter. This is owing to a 7% increase in expenses.

Net profit grows by 8% QoQ during 3QFY10, helped by higher other income and forex gains.

Excluding the other income component for both the quarters, profit is down 27% QoQ. Profit for the nine-month period surge by a whopping 380% on back of better margins and forex gains.

Adds 35 new customers during the quarter, taking the total count to 253. Adds 41 employees (net). The total employee base stands at 8,127 at the end of 3QFY10.

Financial performance: A snapshot...

(Rs m)

2QFY10

3QFY10

Change

9mFY09

9mFY10

Change

Sales

3,150

3,319

5.4%

8,994

9,516

5.8%

Expenditure

2,491

2,661

6.9%

6,550

7,693

17.4%

Operating profit (EBDIT)

659

657

-0.3%

2,444

1,823

-25.4%

Operating profit margin (%)

20.9%

19.8%

27.2%

19.2%

Other income

9

28

211.1%

102

65

-36.7%

Depreciation

159

168

5.3%

410

488

19.1%

Interest

1

1

-33.3%

121

26

-78.9%

Profit before tax

508

517

1.7%

2,015

1,374

-31.8%

Tax

39

153

295.9%

94

278

196.0%

Forex gains/losses

29

174

491.2%

(1,596)

508

Profit after tax/(loss)

499

538

7.8%

325

1,604

393.5%

Share of profit from associates

-

-

27

-

Minority Interest

-

-

18

-

Net profit

499

538

7.8%

334

1,604

380.2%

Net profit margin (%)

15.8%

16.2%

3.7%

16.9%

No. of shares (m)

38.0

39.3

Diluted earnings per share (Rs)*

45.6

P/E ratio (x)*

14.9

* On a trailing 12-month basis

What has driven performance in 3QFY10?

Mindtree recorded a 5% QoQ growth in topline during 3QFY10. This was mainly due to higher volumes in the ‘product engineering’ services. The company saw an increase in the fee based revenue for its offshore services. Based on industry verticals, it saw decent traction in Software Product Engineering (SPE, 35% of topline) and R&D (15% of topline) segments which grew by 20% and 2% QoQ respectively. However, performance remained muted for manufacturing, banking and financial services, and travel and transportation segments.

The US, Mindtree’s largest market contributing 73% to the revenues, registered muted recovery. There was a 27% QoQ growth in revenues from the Indian business and the same contributed over 6% to this quarter’s total revenue. However, the European market, which contributes around 18%, saw a decline of 8% QoQ.

Mindtree added 35 new clients during the quarter, thus taking the total number of active clients to 253. The total employee strength stood at 8,127. The attrition rate at the end of the quarter stood at 10.7%, as compared to 9.7% at the end of 2QFY10.

Revenue Break-up

(In Rs m)

2QFY10

3QFY10

Change

On basis of segment

IT Services-Revenues

1,724

1,697

-1.6%

Product Engineering Services

1,426

1,622

13.7%

On basis of industry vertical

Manufacturing

419

402

-4.1%

BFSI

548

531

-3.1%

Travel and transportation

435

418

-3.8%

R & D

469

478

1.8%

Software Product Engineering (SPE)

954

1,145

20.0%

Other

324

345

6.4%

On basis of geography

US

2,085

2,137

2.5%

Europe

661

611

-7.7%

India

167

212

27.2%

Rest of the world

236

358

51.7%

IT Services Revenue Breakup

ADM

1,217

1,232

1.2%

Consulting and IP licensing

50

42

-15.1%

Package implementation

74

71

-3.9%

Independent Testing

314

288

-8.1%

Infrastructure management and support

69

63

-8.9%

Mindtree’s operating margins contracted by 1.1% QoQ during the quarter. This was because of higher expenses and changed effort-mix. The offshore component of revenue increased with a robust pickup in demand in India. This however affected the margins. The company also registered a significant improvement in receivables days. These stood at 65 days at the end of 3QFY10 as against 70 days at the end of 2QFY10.

Mindtree’s net profit increased 8% during 3QFY10. This was on account of higher forex gain and other income. Excluding these non-operating gains, the company registered a decline of 32% QoQ in its profit during the quarter. During 9mFY10, the company’s net profit increased nearly 5 times on the back of forex gains (as against forex losses in 9mFY09).

What to expect?

At the current price of Rs 681, the stock is trading at a multiple of 8.8 times our estimated FY12 earnings. Given Mindtree’s 9mFY10 performance, we would have to slightly revise downwards our full year FY10 estimates. During the analyst conference call yesterday, Mindtree’s management indicated that it believes the global recovery has begun to take shape. It finds the business environment and customer confidence a lot stronger than the recent past. It has revised its guidance for the current fiscal significantly upwards. Its latest revenue guidance for FY10 stands in the range of Rs 12,777 m to Rs 12,825 m. Net profits are expected to be in the range of Rs 1,920 m to Rs 1,956 m with an annual EPS of around Rs 48.6 to Rs 49.5. Mindtree’s recent acquisition of Kyocera Wireless India (KWI, now Mindtree Wireless Pvt. Ltd.) has started to show synergy. It contributed positively to company’s financial performance during the quarter.
We had recommended the stock in November 2008, and it has already
crossed our target price since then. At the current valuations, we believe the stock is fairly priced.

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